Tune In TV's Comeback

The economics of broadcast television have practically demanded that this happen, because networks make money in a brutally elemental way: Multiply the number of viewers by the price charged to advertisers to reach them, and multiply that by the number of commercials sold per day. Broadcasters sell out almost 100% of their inventory, so the amount that a network earns is a function of ad pricing, ratings and production expenses.

Network execs used to live and die on their ability to deliver a large number of viewers. Now they have the added, urgent task of ensuring viewers also won't skip advertisers' messages.

The problem in recent years is that ratings and ad prices have both fallen. Even in the second quarter of this year, ratings sank 6% among adults 18 to 49 in every time period, from prime time to weekends. The largest part of the dip came from a 9% slide in male viewers. Female viewers were down 4% at all networks except Fox, the television arm of News Corp.

Channel Stuffed

Although this erosion sounds bad, it's not quite as lousy as expected. The most troublesome kink to overcome is a loss of ad pricing power, as supply and demand have misaligned.

Look at the numbers: As the average number of TV channels per household in the U.S. has risen from 19 in 1985 to 96 in 2005, the amount of available ad inventory has jumped exponentially. Yet at the same time, the potential number of advertisers has plunged amid a wave of mergers among consumer products and services companies.

Procter & Gamble(PG Quote - Cramer on PG - Stock Picks) swallowed Gillette, SBC merged with AT&T(T Quote - Cramer on T - Stock Picks) and AT&T Wireless, Verizon Communications(VZ Quote - Cramer on VZ - Stock Picks) bought MCI, and Sprint Nextel(S Quote - Cramer on S - Stock Picks) bought Nextel in just the past two years.

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